By Danvir Roopra
The importance of an effective, responsive and flexible tax compliance function is shown most clearly when a business embarks on M&A activity. This is the time when forward planning and risk frameworks are most severely tested, placing teams, systems and strategies under pressure to deliver on time.
However, while M&A activity can be a vital driver of growth and value, there’s no doubt that it also creates a tax compliance risk that cannot be ignored. True, tax considerations are a constant throughout the deal lifecycle, but the post-close integration phase is most often where compliance risks peak. This is the point where planning meets execution – and where gaps most often surface that can expose strategic and tactical shortcomings and a lack of effective preparation.
Having worked extensively with clients in this exact situation, it’s clear that understanding the key risk drivers is vital to ensuring that any deal remains well within the established risk parameters. By doing that we can go a long way to ensuring that the post-deal period does not turn into a damage limitation exercise with tax compliance leaders in the firing line when issues do emerge.
So what are those key risks? And how do they threaten a successful deal?
The risks of inherited obligations. The first one centres around inherited obligations and how they will impact the structure of the deal. After closing, typically the buyer will inherit responsibility for the seller’s unfiled returns, open audits, and legacy exposures. This is a consideration in every deal, but especially important in cross-border deals, where varying deadlines, regimes, and tax bases heighten the chance of missed filings and penalties.
The risks of post-deal integration. Finance teams are often restructured post-close, and when key personnel leave, it’s not unusual for institutional knowledge to disappear with them. This goes beyond people: system consolidations can also create data gaps, putting routine filings like payroll, VAT/GST, and transfer pricing at risk.
The risks of post-deal reporting and attention to detail. Following the deal, teams must set about working towards an effective strategy to preserve valuable tax attributes. These will vary depending on the deal, but elements such as loss carry forwards, basis step-ups, and amortisation pools are all likely to crop up and need attention. Most critically, they will require accurate, timely reporting – something the tax compliance team is ideally set up to deliver.
The long-term challenge: building a new framework while reconciling historical obligations. The final question facing tax teams as they aim to navigate and support the M&A process starts to take shape post-deal. Most typically, the critical timing window begins and develops in the first 12-18 months; it’s in this period where the tax compliance systems and processes are the most vulnerable, as teams grapple with the need to reconcile historical obligations while at the same time building and testing new compliance frameworks that are still taking shape in the post-deal phase.
There may be some people – and they are usually found outside the tax compliance function – who question why much of this matters. After all, surely M&A is about value creation and growth, and the question of tax compliance is merely an afterthought to be worked out post-deal when the dust has settled and company value has surged: any post-deal complications can just be handled when they become critical.
However, missteps post-deal can often have an outsized and potentially devastating impact not just on the value creation, but also on the reputational standing of the new business. Those missteps are many and varied, but they can lead to penalties, interest charges, and reputational harm – something that is vital as the new entity emerges and begins to take shape. It is at this point where a reputation for competence and attention to detail is more important than ever.
Most importantly, weak post-close management can undermine deal value by forfeiting tax benefits or surfacing unexpected exposures.
Every experienced tax compliance leader knows only too well that post-close integration is the highest-risk stage for tax compliance. They will have seen these things go wrong – and will have learned the lessons of poor planning and weak leadership. They know that strong planning, clear ownership, and proactive monitoring are essential to safeguard compliance and protect transaction value.
Read more about the challenges and opportunities facing Tax Compliance professionals in BDO’s latest Global Tax Outlook report.
The importance of an effective, responsive and flexible tax compliance function is shown most clearly when a business embarks on M&A activity. This is the time when forward planning and risk frameworks are most severely tested, placing teams, systems and strategies under pressure to deliver on time.
However, while M&A activity can be a vital driver of growth and value, there’s no doubt that it also creates a tax compliance risk that cannot be ignored. True, tax considerations are a constant throughout the deal lifecycle, but the post-close integration phase is most often where compliance risks peak. This is the point where planning meets execution – and where gaps most often surface that can expose strategic and tactical shortcomings and a lack of effective preparation.
Having worked extensively with clients in this exact situation, it’s clear that understanding the key risk drivers is vital to ensuring that any deal remains well within the established risk parameters. By doing that we can go a long way to ensuring that the post-deal period does not turn into a damage limitation exercise with tax compliance leaders in the firing line when issues do emerge.
So what are those key risks? And how do they threaten a successful deal?
The risks of inherited obligations. The first one centres around inherited obligations and how they will impact the structure of the deal. After closing, typically the buyer will inherit responsibility for the seller’s unfiled returns, open audits, and legacy exposures. This is a consideration in every deal, but especially important in cross-border deals, where varying deadlines, regimes, and tax bases heighten the chance of missed filings and penalties.
The risks of post-deal integration. Finance teams are often restructured post-close, and when key personnel leave, it’s not unusual for institutional knowledge to disappear with them. This goes beyond people: system consolidations can also create data gaps, putting routine filings like payroll, VAT/GST, and transfer pricing at risk.
The risks of post-deal reporting and attention to detail. Following the deal, teams must set about working towards an effective strategy to preserve valuable tax attributes. These will vary depending on the deal, but elements such as loss carry forwards, basis step-ups, and amortisation pools are all likely to crop up and need attention. Most critically, they will require accurate, timely reporting – something the tax compliance team is ideally set up to deliver.
The long-term challenge: building a new framework while reconciling historical obligations. The final question facing tax teams as they aim to navigate and support the M&A process starts to take shape post-deal. Most typically, the critical timing window begins and develops in the first 12-18 months; it’s in this period where the tax compliance systems and processes are the most vulnerable, as teams grapple with the need to reconcile historical obligations while at the same time building and testing new compliance frameworks that are still taking shape in the post-deal phase.
There may be some people – and they are usually found outside the tax compliance function – who question why much of this matters. After all, surely M&A is about value creation and growth, and the question of tax compliance is merely an afterthought to be worked out post-deal when the dust has settled and company value has surged: any post-deal complications can just be handled when they become critical.
However, missteps post-deal can often have an outsized and potentially devastating impact not just on the value creation, but also on the reputational standing of the new business. Those missteps are many and varied, but they can lead to penalties, interest charges, and reputational harm – something that is vital as the new entity emerges and begins to take shape. It is at this point where a reputation for competence and attention to detail is more important than ever.
Most importantly, weak post-close management can undermine deal value by forfeiting tax benefits or surfacing unexpected exposures.
Every experienced tax compliance leader knows only too well that post-close integration is the highest-risk stage for tax compliance. They will have seen these things go wrong – and will have learned the lessons of poor planning and weak leadership. They know that strong planning, clear ownership, and proactive monitoring are essential to safeguard compliance and protect transaction value.
Read more about the challenges and opportunities facing Tax Compliance professionals in BDO’s latest Global Tax Outlook report.